How China Joined the Sanctions Game – The Diplomat

If imitation truly is the sincerest form of flattery, as Irish poet Oscar Wilde once claimed, then American policymakers should take China’s steady steps toward becoming an international sanctions power as quite the compliment. Hit increasingly hard by Washington’s sanctions tool as relations with the Trump administration unraveled, Beijing has learned from its scars. Little noticed by pundits and the press, China has quietly moved past its historic distaste for restrictive measures and begun building a sanctions toolkit that mirrors Washington’s. The result is a country that’s more willing and able to weaponize its economy for foreign policy wins and to deter external aggression against its companies. As a result, Beijing will increasingly provide a counterbalance to Washington’s sanctions supremacy and emerge as a rival stand setter in global commerce during the Biden administration and beyond.

China is a late and reluctant participant in the sanctions game. Long before the surge in punitive diplomacy under Presidents Donald Trump and Xi Jinping, Beijing opposed sanctions for ideological reasons and the simple fact that China was often a target of them. The country faced a full U.S. economic embargo following its intervention in the Korean War. After the 1989 Tiananmen Square protests, it was similarly subject to economic restrictions and an arms embargo from the United States and Europe. Owing to such experiences, China historically considered sanctions to be instruments of Western imperialism and a violation of sovereignty. During the Cold War, it regularly used its permanent U.N. Security Council seat to oppose sanctions against countries such as North Korea, Zimbabwe, Libya, and Iran.

There were also practical considerations at play. Sanctions power derives from the ability to credibly deny access to a sought-after economy or international currency, and China arguably only began to accrue that kind of leverage after it joined the World Trade Organization in 2001.

Accordingly, China’s move toward embracing punitive action began with informal measures that provide plausible deniability. Since 2010, Beijing has punished other governments with economic retaliation at least nine times for infringing on its interests, variously suspending imports, blocking exports or tourism, or taking regulatory action against foreign firms active in China. In 2017, for example, it responded to South Korea’s deployment of a U.S. missile defense system by closing stores of a South Korean conglomerate on regulatory grounds and instructing Chinese travel agencies to stop booking trips to South Korea. More recently, it suspended National Basketball Association broadcasts in 2019 after an NBA team official criticized China’s Hong Kong policy. In each case, Beijing publicly attributed the action to a technical regulatory issue or spontaneous acts of patriotism by its citizens.

The Trump administration’s relentless pressure drove Beijing to complement such “sanctions with Chinese characteristics” with a more formal capability. Reeling from additions of over 400 Chinese individuals and entities to the U.S. Commerce Department’s export control lists in just the past two years, including an export ban aimed at isolating its national champion Huawei from Western markets, Beijing began developing tools to fight back. During 2020, it enacted an export control law that constitutes the country’s first framework for restricting exports of military, dual-use, and technology goods for national security reasons. It also unveiled an “unreliable entities” list to target foreign firms that cut off supplies to Chinese companies for non-commercial reasons. The list looks to be directly inspired by Commerce’s Entity List, and inclusion on it can cripple a company’s operations in China.

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New rules issued in early January allow Chinese authorities to punish global companies for complying with foreign restrictions. Chinese citizens or firms can also sue for compensation in Chinese courts if they’re hurt economically by a company’s adherence to foreign laws. In effect, the rules put multinationals in legal jeopardy in China if they’re caught complying with U.S. sanctions.

With that toolkit in place, the China that U.S. President Joe Biden now faces has a new ability to challenge the United States’ legacy role as preeminent standard setter for global commerce and attempt to undermine U.S. dominance of the global financial system. Beijing’s rise as a sanctions rival to the U.S. remains a work in progress, but it’s not too early to draw a few conclusions.

First, Beijing’s framework focuses on denying access to China’s economy and its tech exports. That’s a meaningful threat, given the scale of China’s consumer market and its dominance in 5G patents, but it’s also an implicit admission of China’s still relatively limited financial power. Even as its economy is forecast to become the world’s largest by 2028, the Chinese renminbi still accounts for less than 2 percent of international transactions. Beijing’s sanctions posture could start to mirror Washington’s weaponization of the dollar if the renminbi gains ground as a global trade and reserve currency, but that looks like a much longer-term prospect. China’s capital controls, which helped to stem a homegrown financial crisis in 2015, are one impediment to international expansion. Declining Chinese lending in support of its signature Belt and Road Initiative, a key means of promoting use of the renminbi abroad, is another. Such lending has dropped by more than $70 billion since 2016.

Second, Beijing is building a deterrent capability that it probably prefers not to use. Its export control law is extraterritorial in scope, allowing Beijing to hold individuals or entities outside China liable if they are deemed to endanger China’s national security. Its new rules for punishing global companies are vague and open-ended, both telltale traits of deterrence. And Beijing’s new blacklist, menacing for the loss of market access it implies, remains currently unused. At this stage, those tools simply convey to the Biden administration that restrictive measures targeting China’s economic stars – such as the Alibaba investment ban considered during Trump’s final days – are a red line for Beijing. If crossed, U.S. economic interests in China can expect blowback.

As a result, a form of mutual economic deterrence is likely to take hold between the two countries. Both sides will still use restrictive measures, but within implicitly defined and mutually understood boundaries, resulting in more stable economic diplomacy over at least the short-term. Biden’s emphasis on anti-corruption and human rights make more targeted sanctions against Chinese officials involved in abuses in Xinjiang and Hong Kong a virtual certainty. Commerce will take continued aim at Chinese startups that support Beijing’s domestic surveillance capabilities, and the Pentagon will keep naming and shaming Chinese military companies. In response, Beijing will ban visas for carefully chosen members of the U.S. political class and make American firms selling arms or dual-use items to Taiwan the first additions to its blacklist. But China’s mega-cap tech firms should remain relatively unscathed, and that means the Chinese operations of American companies like Nike, Starbucks, Tesla, and Qualcomm should also be safe.

More broadly, the Biden administration can be expected to replace threats of economic decoupling with an ideological challenge to China’s authoritarianism and use of state-capitalism. In an extreme theoretical scenario, dueling U.S. and Chinese sanctions could force third countries and companies to choose between following their respective rules for finance and trade and, by extension, between the American and Chinese economies. In practice, when pressed most countries seem inclined to demur or play the two powers off against each other. Trump’s global Huawei campaign was a politically expensive failure, with only three of 61 countries lobbied by the U.S. so far having agreed to sever ties with the company. As such, Biden is more likely to spend his precious political capital on building European and Asian alliances to pressure the Chinese Communist Party’s political legitimacy, check Chinese aggression against Taiwan, and restore credibility to U.S.-led liberal values and institutions.

The pullback from decoupling is just as well, because punitive diplomacy only goes so far. Ultimately, entwined economic interests give Washington its best shot at changing some of Beijing’s behavior. But the United States, too, will need to make changes under Biden and beyond. It should expect China to seek influence on par with its position in the world economy. It also needs clearer red lines to define which of China’s power plays encroach on major national interests and are thus truly sanctionable offenses. The alternative is strategic confusion and more mutual economic aggression directed at increasingly sensitive targets with no clear end in sight.

Andrew Rennemo is a member of Chatham House. He has held roles in U.S. government focused on transnational threats and as a management consultant with PwC for risk and compliance and forensic investigation.